Sacco, 40, was given the job one day after Greg Sherman was named general manager and Coach Tony Granato was fired.
Sylvain Lefebvre was also named assistant coach as part of a restructuring of Colorado's upper management.
Sacco had coached Colorado's American Hockey League affiliate, the Lake Erie Monsters, the past two seasons. He will be the fifth person to coach the Avalanche since the franchise moved from Quebec City prior to the 1995-96 season.
"The American Hockey League has proven to be a valuable training ground for NHL head coaches and we're confident that Joe's experience at that level will be vital to his success with our organization at the NHL level," Sherman said. "Our franchise has gone that route very successfully in the past."
Colorado finished with the worst record in the Western Conference last season, going 32-45-5. General Manager Francois Giguere was dismissed on April 13.
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